Taxation experts critique the Coalition's company tax rate cut

MARK COLVIN: Some experts are warning that cutting the corporate tax rate would widen a loophole that allows rich people to avoid tax.

The Coalition's claim that cutting company tax will boost employment is also under fire.

Economics correspondent Stephen Long

STEPHEN LONG: Cut the company tax rate, boost employment and improve the Budget bottom line. It's a 'magic pudding' recipe, slice the tax take and grow the pie.

But there are problems with the Coalition's pledge to lower the company tax rate. One is that it will exacerbate an existing loophole that already allows people on hefty incomes to lower their tax bill.

RICK KREVER: Well what they're doing effectively is reducing the income tax rate for high income earners.

STEPHEN LONG: Professor Rick Krever, director of the Taxation Law and Policy Research Institute at Monash University. His point is that the Coalition's plan will increase the gap between the corporate tax rate and the top rate of personal income tax, providing a windfall to professionals who can set up as contractors or sole traders and avoid the tax rates they'd pay as employees.

RICK KREVER: Almost any self employed person and most professionals can operate as a company, in which case the personal tax rate isn't what affects them, it's company tax rate, what you're effectively doing is lowering the rate for very high income individuals who operate through companies.

STEPHEN LONG: Cameron Rider is a director of the law firm Greenwoods and Freehills, and an eminent tax lawyer. If the Coalition wins, he says he'll have good news for the firm's high net worth clients.

CAMERON RIDER: Well I'd be advising clients that it makes even more sense than it did before to hold investment properties through companies and to operate as independent contractors through companies.

STEPHEN LONG: But if the Coalition is going to fulfil the promise of creating jobs, Cameron Rider says its plan needs a rethink.

CAMERON RIDER: The basic problem we face is that the company tax rate is the same for all companies, regardless of whether they're BHP or the service company of the professional firm. That means that when you offer company tax cuts to try and stimulate employment, you at the same time are really just offering a free tax cut to other people who won't do anything to increase employment but they'll just enjoy a slightly lower rate of tax on income they were earning anyway.

STEPHEN LONG: Unsurprisingly business lobby groups have sung the praises of the Coalition's move, and Labor supports lowering company tax in principle.

The curious thing is that, by international standards, the company tax rate here isn't high. On most credible analysis, however you slice and dice it, Australia ranks no worse than the middle of the pack in the OECD (Organisation for Economic Co-operation and Development), and on some measures towards the bottom. But you get a false picture if you ignore the big taxes levied on companies overseas through employer funded social security contributions.

Rick Krever from Monash.

RICK KREVER: Indeed in many European companies, companies pay much higher social security taxes than they do income taxes. So if you just comparing income tax rates, you're not comparing anything, you're not comparing the true costs of companies of operating in different countries.

STEPHEN LONG: The tax review headed by former Treasury boss Ken Henry recommended cutting the company tax rate to attract foreign investment. But it's unclear how the Coalition plan will achieve that aim because it mainly applies to smaller businesses. A levy the Coalition wants to impose on big business for paid parental leave will be equal to the tax cut, so there's no net gain.

What about the promise that you can cut corporate tax rate and boost government revenue? That's already being compared to the supply side economic theories of the 80s that were derided as "voodoo economics".

Voodoo or valid, it's a matter for debate. But in the short run, the question will be whether it's winning politics.